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11/17/2019 Market Economy: Definition, Pros, Cons, Examples
Market Economy, Its Characteristics, Pro…
US ECONOMY ECONOMIC THEORY
Market Economy, Its

Characteristics, Pros,
and Cons, with
Examples
How the U.S. Constitution Protects America's
Market Economy
ARTICLE TABLE OF CONTENTS Skip to section
Six Characteristics of a Market Economy

Four Advantages of a Market Economy
The Disadvantages of a Market Economy
How the Constitution Protects the U.S. Market Econo…
Economic The Bottom Line
Models
BY KIMBERLY AMADEO Updated May 20, 2019

Capitalism
Socialism
Mixed Economy
Reaganomics
Trickle Down Economics
Market Economy
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Traditional Economy
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Communism
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Command Economy
Image by Joshua Seong © The Balance 2019
A market economy is a system where the laws

of supply and demand direct the production of goods
and services. Supply includes natural resources,
capital, and labor. Demand includes purchases by
consumers, businesses, and the government.
Businesses sell their wares at the highest price

consumers will pay. At the same time, shoppers look
for the lowest prices for the goods and services they
want. Workers bid their services at the highest possible
wages that their skills allow. Employers seek to get the
best employees at the lowest possible price.
Capitalism requires a market economy to set prices

and distribute goods and services. Socialism and
communism need a command economy to create a
central plan that guides economic decisions. Market
economies evolve from traditional economies. Most
societies in the modern world have elements of all
three types of economies. That makes them mixed
economies.
Six Characteristics of a Market Economy
The following six characteristics define a market

economy.
1. Private Property. Most goods and services are

privately-owned. The owners can make legally-
binding contracts to buy, sell, or lease their
property. In other words, their assets give them
the right to profit from ownership. But U.S. law
excludes some assets. Since 1865, you cannot
legally buy and sell human beings. That includes
you, your body, and your body parts.
2. Freedom of Choice. Owners are free to produce,

sell, and purchase goods and services in a
competitive market. They only have two
constraints. First is the price at which they are
willing to buy or sell. Second is the amount
of capital they have.
3. Motive of Self-Interest. Everyone sells their

wares to the highest bidder while
negotiating the lowest price for their
purchases. Although the reason is selfish, it
benefits the economy over the long run. This
auction system sets prices for goods and
services that reflect their market value. It gives
an accurate picture of supply and demand at
any given moment.
4. Competition. The force of competitive pressure

keeps prices low. It also ensures that society
provides goods and services most e ciently. As
soon as demand increases for a particular item,
prices rise thanks to the law of demand.
Competitors see they can enhance their profit
by producing it, adding to supply. That lowers
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the best
competitors remain. This competitive pressure
also applies to workers and consumers.

Market Economy,
Employees vie withIts Characteristics,
each Pro…
other for the highest-
paying jobs. Buyers compete for the best
product at the lowest price. There are three
strategies that work to maintain a competitive
advantage.
5. System of Markets and Prices. A market

economy relies on an e cient market in which to
sell goods and services. That's where all buyers
and sellers have equal access to the same
information. Price changes are pure reflections
of the laws of supply and demand. There are five
determinants of demand.
6. Limited Government. The role of government is

to ensure that the markets are open and
working. For example, it is in charge of national
defense to protect the markets. It also makes
sure that everyone has equal access to the
markets. The government
penalizes monopolies that restrict competition.
It makes sure no one is manipulating the
markets and that everyone has equal access to
information.
Four Advantages of a Market Economy
Since a market economy allows the free interplay of

supply and demand, it ensures that the most desired
goods and services are produced. Consumers are
willing to pay the highest price for the things they
want the most. Businesses will only create those
things that return a profit.
Second, goods and services are produced in the most

e cient way possible. The most productive companies
will earn more than less productive ones.
Third, it rewards innovation. Creative new products will

Market
meet Economy,
the needs Its Characteristics,
of consumers in better ways Pro…
that
existing goods and services. These cutting-edge
technologies will spread to other competitors so they,
too, can be more profitable. This illustrates why Silicon
Valley is America's innovative advantage.
Fourth, the most successful businesses invest in other

top-notch companies. That gives them a leg up and
leads to increased quality of production.
The Disadvantages of a Market Economy
The key mechanism of a market economy is

competition. As a result, it has no system to care for
those who are at an inherent competitive
disadvantage. That includes the elderly, children, and
people with mental or physical disabilities.
Second, the caretakers of those people are also at a

disadvantage. Their energies and skills go toward
caretaking, not competing. Many of these people might
become contributors to the economy's overall
comparative advantage if they weren't caretakers.
That leads to the third disadvantage. The human

resources of the society may not be optimized. For
example, a child who might otherwise discover the
cure for cancer might instead work at McDonald's to
support her low-income family.
Fourth, the society reflects the values of the winners in

the market economy. A market economy may produce
private jets for some while others starve and are
homeless. A society based on a pure market economy
must decide whether it's in its larger self-interest to
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the vulnerable.
If it decides it is, the society will grant the government

a Market Economy,
significant Its Characteristics,
role in redistributing Pro…
resources. As such,
there are so many mixed economies. Most so-called
market economies are mixed economies.
How the Constitution Protects the U.S. Market

Economy
The United States is the world's premier market

economy. One reason for its success is the U.S.
Constitution. It has provisions that facilitate and
protect the market economy's six characteristics. Here
are the most important:
• Article I, Section 8 protects innovation as

property by establishing a copyright clause.
• Article I, Sections 9 and 10 protects free

enterprise and freedom of choice by prohibiting
states from taxing each other’s goods and
services.
• Amendment IV protects private property and

limits government powers by protecting people
from unreasonable searches and seizures.
• Amendment V protects the ownership of private

property. Amendment XIV prohibits the state
from taking away property without due process
of law.
• Amendments IX and X limit the government's

power to interfere in any rights not expressly
outlined in the Constitution.
The Preamble of the Constitution includes a goal to

"promote the general welfare." The government could
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taketo providerole
a larger youthan
with what
a great user experience.
a market economy
prescribes. This led to many social safety programs,

Market
such Economy,
as Social Itsfood
Security, Characteristics, Pro…
stamps, and Medicare.
The Bottom Line
A market economy functions under the laws of supply

and demand. It is characterized by private ownership,
freedom of choice, self-interest, optimized buying and
selling platforms, competition, and limited government
intervention.
Of these hallmarks, competition mostly defines the

market economy, and it’s a two-sided coin. On the plus
side, it fosters innovation, e ciency, and quality in the
production of goods and services. Unfortunately, it
marginalizes those that are unable to contend such as
children, the elderly, the sick, and those who care for
them. Competition often creates income inequality.
The U.S. constitution has laws that protect America’s
market economy.
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11/17/2019 Market Economy: Definition, Pros, Cons, Examples

Market Economy, Its Characteristics, Pro…

US ECONOMY ECONOMIC THEORY

Market Economy, Its

ARTICLE TABLE OF CONTENTS Skip to section

Six Characteristics of a Market Economy

BY KIMBERLY AMADEO Updated May 20, 2019

Trickle Down Economics

Image by Joshua Seong © The Balance 2019

A market economy is a system where the laws

Businesses sell their wares at the highest price

Capitalism requires a market economy to set prices

The following six characteristics deﬁne a market

1. Private Property. Most goods and services are

2. Freedom of Choice. Owners are free to produce,

3. Motive of Self-Interest. Everyone sells their

4. Competition. The force of competitive pressure

also applies to workers and consumers.

5. System of Markets and Prices. A market

6. Limited Government. The role of government is

Four Advantages of a Market Economy

Since a market economy allows the free interplay of

Second, goods and services are produced in the most

Third, it rewards innovation. Creative new products will

Fourth, the most successful businesses invest in other

The Disadvantages of a Market Economy

The key mechanism of a market economy is

Second, the caretakers of those people are also at a

That leads to the third disadvantage. The human

Fourth, the society reﬂects the values of the winners in

If it decides it is, the society will grant the government

How the Constitution Protects the U.S. Market

The United States is the world's premier market

• Article I, Section 8 protects innovation as

• Article I, Sections 9 and 10 protects free

• Amendment IV protects private property and

• Amendment V protects the ownership of private

• Amendments IX and X limit the government's

The Preamble of the Constitution includes a goal to

prescribes. This led to many social safety programs,

The Bottom Line

A market economy functions under the laws of supply

Of these hallmarks, competition mostly deﬁnes the

Market Economy, Its Characteristics, Pro…

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